If you wish to be a successful futures or options investor, you must learn to control your losses. No talent that you develop as a trader will ever be as important to you as this. The formula for success in futures and options trading is: X (AP) – Y (AL) = SUCCESS OR FAILURE (X) is the number of profits that you have. (AP) is your average profit per trade. (Y) is the number of losses that you have. (AL) is your average loss per trade. You multiply the number of profits you have times the average of your profits to arrive at your total profits. You multiply the number of losses that you have times the average of your losses to arrive at your total losses. X (AP) equals total profits. Y (AL) equals total losses. Total profits minus total losses equals success or failure. Of this formula, the two most important letters to you are (AL). Why is the (AL) so important in your effort to achieve success. It is important because (AL) is the only element of this formula that you can control. Think about it for a while and you will see what I mean.
Archives of “element” tag
rssTrading Wisdoms
That enormous profits should have turned into still more colossal losses, that new theories should have been developed and later discredited, that unlimited optimism should have been succeeded by the deepest despair, are all in strict accord with age-old tradition. Benjamin Graham A trading philosophy is something that cannot just be transferred from one person to another; it’s something that you have to acquire yourself through time and effort. Richard Driehaus The essential element is that the markets are ultimately based on human psychology, and by charting the markets you’re merely converting human psychology into graphic representations. I believe that the human mind is more powerful than any computer in analyzing the implications of these price graphs. Al Weiss Opportunities change, strategies change, but people and psychology do not change. If trend-following systems don’t work well, something else will. There’s always money being lost, so someone out there has to win. Gil Blake, New Market Wizards |
Seven Sins of Trading
1. Trading an inappropriate position size.
Simply put…if you risk too much, you’ll lose too much. In my eyes, this is the single most important rule of trading. Risking only 1-2% of an acct value is crucial to staying in the game.
2. Not knowing when to take the loss.
If you cannot answer the questions “Where am I taking the loss,” and “Where is my profit target” then stay out of the market. If you leave these decisions for later, then you will make them emotionally, which will be the worst decisions a trader can make.
3. Trading on someone else’s research or recommendation.
We have all heard stock tips thrown our way. Sometimes we might even hear people throw out potential trades that they are watching and become tempted to jump in. Sometimes I throw out stocks that I am trading and I am watching. The problem is that you might not know what this person is watching for, what strategy this stock fits, or what types of efforts are thrown into their research. If you take these stocks into consideration, make sure they are trades you would have likely come across on your own by conducting your own research. (more…)
Why Trading is Difficult
1. Need to internalize lots of trading simulation of specific set-ups in real-time to trade effortlessly
2. Need to trust money management system to weather +10 losses in a row
3. Tuff to internalize that its the 5-6 huge monthly runners that is the big pay-off days
4. Must master +3 trade set-ups to make money consistently month to month.
5. It takes considerable time to mathematically think and act like a trader
6. Trading is a performance skill which requires mastery of every element of trading
7. It requires time capital and considerable effort to achieve the experience to make it effortless and automatic (more…)
The Pitfalls of Speculation
The question at once asks itself: “How may the top of the market be discerned, and the dangers of the eleventh hour be avoided?” The answer is more or less complex.
It is, of course, necessary above all things to revert to the estimated and fixed value of the stocks traded in and to find out how much above this normal point the securities are selling. This done, common sense, plus prudence, and minus piggishness, may determine the question and dictate the time for liquidation. This action, however, once decided upon must be adhered to with great rigidity, for thousands of traders who thus take time by the forelock have been dissatisfied afterwards by seeing a still greater advance in which they had no interests, and through greed and impatience have re-entered the lists at a most inopportune time.
The trader who realizes his profits, and sees a further advance following his own withdrawal from the market, may console himself with the fact that he has made and secured a profit; that trying to guess the exact extreme of a cycle is hazardous, and that the advance which followed his withdrawal is unsound, being founded on speculation rather than valuation.
But this is a digression from the technical phase of the matter. So far as it is possible to judge the culmination of the speculative campaign by extraneous appearances, it may be said that a long period of backing and filling, a swinging back and forth of prices at the approximate high level marks the beginning of the end.
The definition of the “top” of the market is that point at which the great traders have almost in unison decided to unload, and per contra, the public has reached its highest level of enthusiasm. At the beginning of this period the insiders possess and enormous aggregate of stocks which must be sold in such a manner as not to break the market. This operation will take weeks, or even months to accomplish, as any precipitate selling would be disastrous. The wise element, therefore, sells all the market will absorb without any severe decline, and ceases selling, or even takes the buying side at the first sign of any “softness.” In short, they do all they can to maintain a good feeling and high prices, at the same time parting with the securities as rapidly as possible.
This statement may convey the impression that the shrewd speculators act in unison. This is true, but not necessarily in the sense that there is any preconceived arrangement between them. The unison or more or less unconscious, and is founded on the fact that there are only two sides to the market, the right and the wrong side, and that those of the speculative world who have sufficient wisdom and experience to know what is right are working to the same end, while all the inexperienced or unthinking horde are working on theories diametrically opposed to reason or even probability.
From the SAME AS IT EVER WAS files:
The Pitfalls of Speculation by Thomas Gibson, 1906.
Look Inside Yourself
One trader wrote in that he was in a slump and wondered if he should switch markets or find another indicator.
Do you ever find that you also want to blame something outside yourself?
One of my favorites used to be blaming ‘the system’ – the system is rigged against me: the brokers are the only ones getting rich, robbing me on these bid/asked spreads, hunting all my stops, etc.
When you blame an external situation, you are giving up control, and instead letting yourself be controlled by outside events. This converts you from a proactive trader into a reactive trader. Or a winner into a whiner.
If you are reacting after the fact in the markets, you are then letting your emotions start to control you, instead of planning how you will react to any set of circumstances.
You know how letting emotions control you turns out in the markets. You go broke.
You must believe that you control your own destiny. If you are not getting the results you expect of yourself, look inside yourself.
Start analyzing your actions and behavior. Are you hanging on to losses too long? Are you cutting profits too soon? Are you having trouble pulling the trigger only to watch in frustration as your trade wins without you?
These and other frustrations should clue you in that you need to fix some element of your trading plan. Evaluate your present situation, and if it needs to change, take decisive action and change it.
50 Trading Rules
1. Plan your trades. Trade your plan.
2. Keep records of your trading results.
3. Keep a positive attitude, no matter how much you lose.
4. Don’t take the market home.
5. Continually set higher trading goals.
6. Successful traders buy into bad news and sell into good news.
7. Successful traders are not afraid to buy high and sell low.
8. Successful traders have a well-scheduled planned time for studying the markets.
9. Successful traders isolate themselves from the opinions of others.
10. Continually strive for patience, perseverance, determination, and rational action.
11. Limit your losses – use stops!
12. Never cancel a stop loss order after you have placed it!
13. Place the stop at the time you make your trade.
14. Never get into the market because you are anxious because of waiting.
15. Avoid getting in or out of the market too often.
16. Losses make the trader studious – not profits. Take advantage of every loss to improve your knowledge of market action.
17. The most difficult task in speculation is not prediction but self-control. Successful trading is difficult and frustrating. You are the most important element in the equation for success.
18. Always discipline yourself by following a pre-determined set of rules.
19. Remember that a bear market will give back in one month what a bull market has taken three months to build.
20. Don’t ever allow a big winning trade to turn into a loser. Stop yourself out if the market moves against you 20% from your peak profit point.
21. You must have a program, you must know your program, and you must follow your program.
22. Expect and accept losses gracefully. Those who brood over losses always miss the next opportunity, which more than likely will be profitable.
23. Split your profits right down the middle and never risk more than 50% of them again in the market.
24. The key to successful trading is knowing yourself and your stress point.
25. The difference between winners and losers isn’t so much native ability as it is discipline exercised in avoiding mistakes.
26. In trading as in fencing there are the quick and the dead.
27. Speech may be silver but silence is golden. Traders with the golden touch do not talk about their success.
28. Dream big dreams and think tall. Very few people set goals too high. A man becomes what he thinks about all day long.
29. Accept failure as a step towards victory.
30. Have you taken a loss? Forget it quickly. Have you taken a profit? Forget it even quicker! Don’t let ego and greed inhibit clear thinking and hard work. (more…)
Trading Psychology Observations
-From working with developing traders, I’d say that 90% don’t/can’t sustain the process of keeping a substantive journal. Among the group that does journal, well over 90% of the entries are about themselves and their P/L. I almost never see journal entries devoted to figuring out markets.
-A sizable proportion of traders who have been having problems are trading methods and patterns that used to work, but are no longer operative. The inability to change with changing markets affects traders intraday (when volume/volatility/trend patterns shift) and over longer time frames (when intermarket patterns shift).
-Some traders habitually look for tops in a rising market and bottoms in a falling one. There’s much to be said for countertrend methods, but not when the need to be right exceeds the need to make money.
-An underrated element in trading success is mental flexibility: the ability to shift views and perceptions as new data enter the marketplace. It takes a certain lack of ego to form a strong view and then modify it in the face of new evidence.
-Many traders fail because they’re focused on what the market *should* be doing, rather than on what it *is* doing. The stock market leads, not follows, economic fundamentals. Some of the best investment opportunities occur when markets are looking past news, positive or negative.
3 Trading Lessons
A good trade can lose money, and a bad trade can make money. Even the best trading processes will lose a certain percentage of the time. There is no way of knowing a priori which individual trade will make money. As long as a trade adhered to a process with a positive edge, it is a good trade, regardless of whether it wins or loses because if similar trades are repeated multiple times, they will come out ahead. Conversely, a trade that is taken as a gamble is a bad trade regardless of whether it wins or loses because over time such trades will lose money. Ray Dalio, the founder of Bridgewater, the world’s largest hedge fund, strongly believes that learning from mistakes is essential to improvement and ultimate success. Each mistake, if recognized and acted upon, provides an opportunity for improving a trading approach. Most traders would benefit by writing down each mistake, the implied lesson, and the intended change in the trading process. Such a trading log can be periodically reviewed for reinforcement. Trading mistakes cannot be avoided, but repeating the same mistakes can be, and doing so is often the difference between success and failure. For some traders, the discipline and patience to do nothing when the environment is unfavorable or opportunities are lacking is a crucial element in their success. For example, despite making minimal use of short positions, Kevin Daly, the manager of the Five Corners fund, achieved cumulative gross returns in excess of 800% during a 12-year period when the broad equity markets were essentially flat. In part, he accomplished this feat by having the discipline to remain largely in cash during negative environments, which allowed him to sidestep large drawdowns during two major bear markets. The lesson is that if conditions are not right, or the return/risk is not sufficiently favorable, don’t do anything. Beware of taking dubious trades out of impatience. |
Is stock trading difficult? Depends on who you ask.
Is stock trading difficult? Depends on who you ask. A seasoned trader with the discipline to follow well honed principles will say “trading is not difficult. See how I take losses and let my winners run?” A battered and bruised, emotionally unstable trader will say “the market is difficult. I am getting my @ss handed to me on a platter and it hurts!” A breakeven trader will say, “compared to my broker I am not doing so bad.” Our perspective makes all the difference in our success of failure. If we can have the proper perspective then the market cannot hurt us. The proper perspective includes, but is not limited to, the following: The market will do what it wants to do when it wants to do it regardless of the technical games we play. We win some lose some, in no particular order, on any given strategy. The only trading mistake that matters is when future uncertainty is not properly considered an essential element of risk. The long-term process, not short term outcomes, builds the consistency necessary to tackle market uncertainty. Responsibility accepted before the trade becomes the disciple that carries us through the trade. The best money is oftentimes made by being a non-participating, impartial observer.
So the next time someone asks if stock trading is difficult. What will be our answer? Will it be based on the proper perspective or on the last trade we made? On emotions? On our reaction to price action? News? Compared to what? A successful bust or a skinned knee? The answer can make a difference. |